The “Insurance Hoax” — Insurers Paying Too Little and Too Late

Bloomberg recently published a hard-hitting piece decrying the property-casualty industry’s claims-handling practices. Insurers perceive that the article to punches below the belt, as this response from the Insurance Information Institute shows. The III piece is interesting to me because of its immoderate tone, something at odds with most of the writing that comes from III, which is a great source of financial statistics in particular on the performance of the P-C insurance industry. While the III is certainly right that insurers pay claims every day, the III and the rest of the industry need to recognize the wide-spread perception that at the point of claim insurers adopt an adversarial posture. Experienced, thoughtful observers of the industry have written about this at length (and the linked article is I think the most important thing ever written on the P-C industry), and the point of first-party insurance bad-faith law in part is to counterbalance the power imbalance that insurers hold over their insureds at the time of claim — at the time their insureds are most in need and dependent on their performance, which explains the emotional oomph that typifies through-the-eyes-of-insureds’ reporting on insurers’ claims-paying (or claims-denying) practices.
I agree with the III that the Bloomberg story is too facile, and it is inappropriate to leap from the observation that an insurer paying less than what the policyholder wanted ineluctably means that the insurer is paying less than what the policyholder deserved. I recently suffered a major homeowners’ loss when a (crazed) intruder broke into my home and caused huge amounts of damage; our insurer was fantastic in dispatching someone to board up a broken door, arrange for a contractor to do repair work, and reimburse us for other loss (including paying the vendor of our choice on some home electronics). So I know first hand that insurers can ride to the rescue, treat their customers with “good hands,” and live up to their advertising slogans. On the other hand, I bring suits against insurers on behalf of clients when I think amounts are owed and unpaid, and I am kept busy by wrongful denials by insurers inflicted against my corporate clients (both large and small). At a time when respected news outlets like Bloomberg (and CNN and PBS) feel comfortable producing pieces that seem well suited to the Fight Bad Faith Insurance Companies website, the insurance industry should look deep into its practices and understand the perceptions of consumers and businesses to ensure that insurers’ historic mission of helping their insureds, being “there” in the time of need, is embraced and, more importantly, put into practice every day in paying claims.

A Man, A Plan, A Canal — A Flood

No one should be surprised that the United States Court of Appeals today reversed the decision of the Louisiana District Court on whether losses occasioned by rising water in New Orleans was the result of a “flood” and thus excluded from coverage under several different forms of “flood” exclusion. The case, In Re Katrina Canal Breaches Litigation (5th Cir. Aug. 2, 2007), centered on whether the negligence in the design and construction of the levees that allowed water to escape from the protective flood-control system should be considered to be the operative event for insurance purposes, such that the water damage resulting cannot be said to have arisen from a “flood.” The Fifth Circuit ruled that “even if the plaintiffs can prove that the levees were negligently designed, constructed, or maintained and that the breaches were due to this negligence, the flood exclusions in the plaintiffs’ policies unambiguously preclude their recovery.”

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Appraising Appraisers and Appraisals

In many property-insurance policies, a party has a right to demand an appraisal, which is procedure in which the value of lost or damaged property is determined. Typically, an appraisal takes the form of what I call a 1 + 1 + 1 structure – each party appoints its own appraiser, and if the two party-appointed appraisers cannot agree on a number the two together then select an umpire (or a court will select an umpire to decide if the two cannot agree on one). That some form of alternative dispute resolution is used for valuation, however, does not mean that there is no room for judicial intervention in disputes involving insurance policies with appraisal provisions.

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The Risks of the Seas and of Federal Courts Seizing — or Being Seised of — Jurisdiction

Insurance contracts typically are creatures of state law. As a result, unlike other kinds of complex litigation, insurance-coverage disputes often are litigated in state, not federal, court. There are exceptions to this where there is diversity jurisdiction, though in complex, multiparty coverage cases it is often unusual for there to be complete diversity between and among all the parties.
Insurance disputes can end up in federal court under admiralty jurisdiction, which provides a jurisdictional hook to get into federal court where the insurance is maritime in character – or what is sometimes referred to as “salty.” There are traditional forms of maritime insurance that are subject to federal jurisdiction, such as hull, protection and indemnity, and cargo. Other forms of coverage may have a relationship to maritime risks, and parties may fight over getting into federal court and having federal admiralty law apply.

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Stranded without Recourse: FEMA Halts Payment of Flood-Insurance Claims

The insurance industry long has inculcated the belief that, in the policyholder’s time of need, the insurer will be a steadfast source of protection, compensation, and prompt relief. Over the past couple of months, close to a quarter million policyholders have turned to their (federally backed) flood insurers and filed claims under flood-insurance policies for losses from Katrina, Rita and Wilma. There are nearly 100 insurance companies whose write-your-own (WYO) flood-insurance policies are backed by FEMA, and FEMA – amazingly, alarmingly – has told those insurers to stop paying claims.

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Blowin’ in the Wind: Insurance Coverage for Wind, Rain, and Wind-Driven Rain

Seemingly in anticipation of the expected deluge of coverage disputes arising from Katrina, Rita, and Wilma, the Second Circuit released a careful opinion in a case where rain damage resulted from wind-caused openings in a building. The precise issue concerned application of a “wind deductible,” but the decision sweeps more broadly in addressing the methodology for interpreting policies in determining covered causes of loss and the relevance of insurance-industry practice. Turner Constr. Co. v. ACE Prop. & Cas. Ins. Co. (2d Cir. Oct. 28, 2005).

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Good Deeds, Smart Business, Corporate Waste, and Ex Gratia Payments

Americans in the Gulf States have endured Katrina and Rita in close succession, similar to how their Florida neighbors suffered through a series of hurricanes last year. Those who have been affected by these hurricanes naturally turn to their insurers for help. When losses stem from both of the recent hurricanes, however, insurers can compound their insureds’ financial woes by requiring them to absorb separate deductibles for each storm.
Some insurers have responded by saying that only one deductible will be required in these circumstances. That decision, however, potentially exposes those insurers on the reinsurance and shareholder fronts.

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Katrina — Submit Your Proofs of Loss or Forfeit Insurance Coverage — Updated!

The federal government provides flood insurance protection principally through private insurance companies. These flood policies require that the insured file a sworn proof of loss within 60 days from the date of the damage. In the circumstances of Katrina, there has been a great desire to assist policyholders in obtaining their coverage benefits. FEMA apparently has responded by relaxing the period within which to file a claim and, if necessary, to bring suit.

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Tragedy and Failure

Insurers dealing with Katrina losses are caught between a rock and a hard place — more accurately, between flood and wind-driven rain. Generally, under typical homeowners policies, flood-caused loss is excluded but wind-driven rain and other windstorm-caused loss is covered. The Mississippi attorney general, under pressure from leading members of the plaintiffs’ mass-tort bar, has brought suit seeking to force insurers to pay claims, notwithstanding the terms of the insurance policies.
There is historical precedent for insurers’ paying claims following mass disaster in derogation of policy terms. The story is told famously of Cuthbert Heath, an underwriter at Lloyd’s of London, who following the San Francisco earthquake cabled his US attorneys saying: “Pay all our policyholders in full irrespective of ther terms of their policies.” And there seems to be little doubt that this decision of C.E. Heath helped establish the positive reputation (deserved or not) Lloyd’s enjoyed in the US for many, many years.

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Businesses Far from Katrina May Have Insurance Claims

Businesses lucky enough to be located outside of Katrina’s wrath still are exposed to losses from the hurricane: while they may not have suffered physical losses to their assets, their suppliers or customers, or both, may have been damaged. As a result, these “unaffected” businesses may have coverage for their own economic losses stemming from Katrina.

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